Friday’s analyst upgrades and downgrades

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Inside the Market's roundup of some of today's key analyst actions

Canadian Real Estate Investment Trust (REF.UN-T) is now fully valued relative to its current growth outlook, according to BMO Nesbitt Burns analyst Heather Kirk, who recommended investors seek a better entry point.

Though she continues to view the company as "one of Canada's highest quality REITs with a solid track record of value creation and a strong management team," Ms. Kirk downgraded her rating to "market perform" from "outperform" based on price appreciation.

"The unit price is up 21.7 per cent over the last 12 months and the lift in the last month has been close to 6.8 per cent," she said. "CREIT is now trading at a [approximately] 13-per-cent premium to our NAV [net asset value] (implied cap rate of 5.4 per cent) which compares with the REIT's historical average premium of 2.5 per cent and to the current sector-weighted average premium of 3 per cent."

On Thursday, CREIT reported second-quarter cash same property net operating income (SPNOI) fell 1.4 per cent year over year, which Ms. Kirk attributed largely to Lowe's vacating a 539,000 square foot distribution centre in Milton, Ont. Retail SPNOI fell 0.4 per cent, office SPNOI dropped a mere 0.1 per cent and industrial declined 5 per cent due to the Lowe's departure.

"We estimate that portfolio cash SPNOI would have been up modestly excluding Lowe's," she said. "Backfilling vacancies continues to progress well, and first-half leasing activity of [about] 2.5-million sq.ft. is the strongest we have seen since 2009. While the industrial portfolio is performing well (excluding Lowes), at only 22 per cent of total NOI, it is difficult to forecast meaningful portfolio NOI growth with retail and office still struggling. The balance sheet and payout ratios remain among the best in the business in our view, providing CREIT with ample financial flexibility. The development and mezzanine loan program provide continued source of growth, but with a higher risk profile."

Ms. Kirk increased her price target to $50 from $48.50. The analyst average price target is $50.21, according to Bloomberg.

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In a research note previewing second-quarter results for the power and utilities sector, Desjardins Securities analysts warn investors to "pick your places" due to rising valuations.

"The likely continuation of a low rate environment in Canada and the U.S., at least for a while, should provide a tailwind as investors look to this sector for its attractive yield, as well as cash flow visibility, stability and growth, which led to our broad target increases for the IPPs," they said. "That said, in our view, some names are fully valued and investors should seek reasonably valued names with tangible growth prospects and the ability to increase their dividends."

Citing an increased valuation, analyst Bill Cabel downgraded his rating for Brookfield Renewable Partners LP (BEP.UN-T) to "hold" from "buy."

"Our ratings change is not based on an altered view of the company's outlook (we believe it has a high-quality asset portfolio and strong management team); rather, the downgrade is simply based on a valuation call as the expected total return no longer justifies a buy rating at this point," said Mr. Cabel. "We believe that valuation has become stretched at current levels and we see better risk/reward opportunities elsewhere in our coverage."

Mr. Cabel did raise his target price for the stock to $43 from $41.50. The analyst consensus price target is currently $45.97, according to Thomson Reuters.

"Although we now have a hold on the stock, we believe investors could look to find relative safety in this larger-cap name which provides an attractive yield and see no harm in owning the stock, assuming investors are comfortable with the more limited total return potential," he said.

On the sector, as a whole, the analysts said: "The sector continues to generally outperform the broader Canadian market. On average, our coverage universe has provided a total return of [about] 36 per cent over the last 12 months and 25 per cent year to date in 2016, which compares favourably with the S&P/TSX Composite Index at 7 per cent and 14 per cent, respectively. The relative uncertainty in the market and in macro conditions, and the noticeable decline in bond yields have been strong tailwinds for the sector. Investors continue to invest in the sector as it not only offers an attractive, stable yield (average dividend yield of 5.3% for our coverage) backed by operating assets with mostly long-term, stable cash flows and earnings visibility, but most companies also have solid growth prospects. We do not anticipate any near-term rate increases in Canada, and the US Fed continues to project a fairly dovish tone, with the general view that any increases that might occur later this year would be relatively modest. Assuming we remain in a 'lower for longer' interest rate environment and there are no other sectors (eg resource-related) that offer a compelling positive investment thesis, we believe our names under coverage should perform relatively well. That said, we cannot say the sector is cheap and many names appear fully valued, in our view — as such, it is reasonable to assume that the recent strong share price appreciation across the sector has largely played out and future performance should be more company-specific (new growth, derisking events). In this context, we believe investors must focus on names that deliver the most growth — organically and/or through accretive acquisitions — and can turn that growth into steady dividend increases, which has typically driven performance over the last several years."

They made several target price changes to the sector's stocks. They were:

- Algonquin Power & Utilities Corp. (AQN-T, buy) to $14.25 from $13.75. Consensus is $13.53.

- Boralex Inc. (BLX-T, buy) to $22.50 from $22. Consensus is $21.31.

- Innergex Renewable Energy Inc. (INE-T, hold) to $15 from $14.25. Consensus is $16.25.

- Northland Power Inc. (NPI-T, buy) to $27.50 from $27. Consensus is $25.39.

- Pattern Energy Group Inc. (PEGI-Q, buy) to $26 (U.S.) from $25.50. Consensus is $26.32

- TransAlta Renewables Inc. (RNW-T, hold) to $13.50 from $12.50. Consensus is $13.78.

- Valener Inc. (VNR-T, hold) to $22 from $20.50. Consensus is $21.90.

"We currently believe PEGI and ECI [EnerCare Inc, buy, $19] are on the bubble when it comes to our buy rating threshold (typically a total return of 15 per cent), but will wait to see the outcome and outlook exiting the quarter as both companies might provide some news that could impact our forecast/valuation," the analyst said.

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Canaccord Genuity analyst David Hynes downgraded Netsuite Inc. (N-N) after it announced an agreement to be acquired by Oracle Corp. (ORCL-N) for $109 per share in cash.

"Given that there was really only one logical (or capable) buyer of NetSuite, we find the transaction value at [greater-than] 7 times enterprise value/revenues on estimated 2017 [calendar year] to be a good outcome for N holders," said Mr. Hynes. "In our view, NetSuite will be a technological upgrade to Oracle's existing cloud ERP [enterprise resource planning] offering (Fusion re-write), gives the firm an immediate and meaningful presence in the midmarket, and should be relatively seamless from a technical integration standpoint given that N was built on ORCL's stack. With Ellison ownership being a gating/prohibitive factor in realizing any competitive bid, we think this is more or less a done deal, and as such we are downgrading our rating."

He moving his rating to "hold" from "buy," citing limited upside to the deal price. He moved his target to the sale price of $109. The average is $102.11

Elsewhere, several other analysts made rating changes to the stock, including:

• JPMorgan’s Mark Murphy to “neutral” from “over-weight” with a $109 target (from $94)
• Raymond James’ Terry Tillman to “market perform” from “underperform” with a specified target.
• Morgan Stanley’s Stan Zlotsky to “equal-weight” from “under-weight” with a $109 target (from $60)

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Expressing increased confidence in the overall execution of Lululemon Athletica Inc.'s (LULU-Q) initiatives, in particularly its product line for men, Citi analyst Paul Lejuez raised his target price for the retailer.

"This report is partly a personal fashion note from me as a consumer," he said. " I'll just admit it, LULU's Commission and ABC pants are the most comfortable pants I own. Even better, they look like chinos/khakis so I could wear them to work, except for one thing … there is a black logo on the side of the knee. In a sign they are listening to feedback (which is important), beginning in 1Q, the logo on the beige pants is beige, so it doesn't stand out. They also began giving men black bags at checkout (rather than the traditional red ones they give to women). These are big improvements and show they are serious about connecting with a male customer. If they got rid of the logo on men's pants, I think it could open up a whole new market."

"In conversations with many clients/friends about LULU, I think I represent a large majority with my views (from a consumer perspective): Whether that logo is black or beige, I can't risk getting called out wearing yoga pants to work (regardless of the comfort). And it isn't about the LULU logo specifically. I couldn't have a Nike or UA logo on the side of my knee either. It just isn't an acceptable place for a logo on 'work pants.' So I don't wear them to work. I wear them to golf, outdoor events, on planes, but not to work."

Mr. Lejuez added: "If there was no logo, I would wear these pants to work in place of traditional khakis. And I would tell people they were LULU. But I want to initiate the discussion - I don't want someone to ask if those are LULU pants I'm wearing. I want to control the message. Although men's has seen strong growth in recent quarters (six consecutive qtrs. of 15-per-cent growth), taking this next step could open up a market where they are not currently on the radar screen."

Maintaining his "buy" rating for the stock, his target increased to $89 (U.S.) from $78. Consensus is $71.21.

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After reporting second-quarter results which met expectations, CIBC World Markets analyst Stephanie Price raised her price target for Constellation Software Inc. (CSU-T).

On Thursday, the Toronto-based tech company reported revenue of $529-million, topping the consensus forecast of $511-million, and EBITDA margins of 25.7 per cent.

"Constellation spent $49-million on acquisitions in Q2 and $73-million year to date (we are modelling $200-million for the full year)," the analyst said. "We believe that the deal pipeline is relatively unchanged, with management noting it is working to broaden its coverage of smaller software companies to expand the deal funnel.

"Organic growth of 3 per cent was positive for the first time in several quarters. Hardware contributed 1 per cent of the organic growth, although organic growth was relatively broadly based. We expect that organic growth will continue to fluctuate based on the makeup of future acquisitions (which often come with legacy contracts, etc.)."

Maintaining her "sector performer" rating, Ms. Price's target jumped to $537 from $510. Consensus is $563.41.

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In other analyst actions:

Citing a difficult pricing environment and weaker-than-expected Asia product performance, Goldman Sachs analyst Patrick Archambault downgraded Ford Motor Co. (F-N) to "neutral" from "buy" and lowered his target price to $13 (U.S.) from $15. The analyst average is $13.93.

Home Capital Group Inc. (HCG-T) was downgraded to "hold" from "buy" by Industrial Alliance Securities analyst Dylan Steuart. His target fell to $34 from $42. The average is $34.94.

Calfrac Well Services Ltd. (CFW-T) was downgraded to "sell" from "hold" by Paradigm Capital analyst Jason Tucker. He raised his 12-month target price to $2.10 per share from $1.80, compared to an average of $4.28.

Goldcorp Inc. (G-T) was raised to "buy" from "hold" at Mackie Research Capital by analyst Barry Allan. He raised his target to $28 from $26.50. The average is $28.81.

Meanwhile, EVA Dimensions analyst Timothy Stanish downgraded Goldcorp to "underweight" from "hold" without a specified target.

Methanex Corp. (MX-T) was raised to "buy" from "hold" by TD Securities analyst Cherilyn Radbourne with a target of $46.11 (up from $42.18). The average is $49.36.

Argus Research Corp analyst David Toung downgraded Gilead Sciences Inc. (GILD-Q) to "hold" from "buy" without a target. The consensus is $106.19 (U.S.).

Robert Baird analyst Mark S. Marcon downgraded Automatic Data Processing Inc. (ADP-Q) to "neutral" from "outperform." He did not change his target of $94 (U.S.), versus the consensus of $92.46.

Editor's note: An earlier version of this story said the target for Constellation Software fell. In fact, it rose.